Fair Work Commission confirms it has no power to reduce redundancy pay if source of redundancy entitlement arises from an Award or Enterprise Agreement

In April this year, the Fair Work Commission (FWC) published two contrasting decisions regarding applications by employers to reduce the amount of redundancy pay due to their incapacity to pay. These decisions were the first two of their kind since the COVID-19 pandemic (see our article here for further information). However, the FWC has recently quashed a decision to reduce a $12,000 redundancy payment for an award-covered employee to nil, ruling that the "incapacity to pay" provisions in the Fair Work Act 2009 (FW Act) do not apply when the entitlement to a redundancy payment arises from an alternative source such as an award.

 

Redundancy pay provisions in the FW Act

An employee whose position has been made redundant is ordinarily entitled to redundancy pay reflective of their period of continuous service with their employer, as prescribed under section 119 of the FW Act. That said, under section 120 of the FW Act, an employer may apply to the FWC to reduce the amount of redundancy pay payable to an employee, including to nil, if the employer cannot pay the amount (the "incapacity to pay" provisions).

However, the FW Act further provides that employees to whom an industry-specific redundancy scheme in a modern award or enterprise agreement applies are not covered by the redundancy pay provisions in the FW Act.

The JFM Civil Contracting decision

Background

JFM Civil Contracting Pty Ltd (JFM) operates in the building and construction industry and is covered by the Building and Construction General On-site Award 2010 (Award). Mr Fraser was employed by JFM under the Award for more than four years.

JFM experienced a severe reduction in business last year when it failed to renew contracts with Gold Coast City Council. On 11 November 2019, JFM issued a notice of redundancy to its employees advising the employees that they may be made redundant five weeks after the date of the notice.

More than five weeks after the date of the redundancy notice, Mr Fraser resigned from JFM as he was able to take up some casual work with another employer. Shortly after taking up work with the other employer, Mr Fraser requested his eight-week redundancy entitlement under the Award.

In the first instance,1 Commissioner Spencer granted a reduction of the $12,000 eight-week redundancy entitlement to zero pursuant to section 120(2) of the FW Act. The Commissioner found that even though Mr Fraser left JFM on his own accord, he was still entitled to redundancy pay given the industry specific redundancy scheme that is contained in the Award. This is due to clause 17.6 of the Award, which provides that an employee who leaves their employment once notice of termination has been given (due to redundancy) will still be entitled to a redundancy payment as if the employee had worked until the end of the notice period. However, JFM did not need to make this payment due to evidence which demonstrated its "stark incapacity to pay and to remain operational".

On appeal

On appeal,2 the Full Bench of the FWC stated that the ability to make a reduction to redundancy pay under section 120 of the FW Act does not apply to employees covered by an award, but rather only employees to whom section 119 of the FW Act applies. The Full Bench held that as Mr Fraser's entitlement to redundancy pay came from the Award and not section 119 of the FW Act, it had no authority to reduce his entitlement.

The FWC ultimately upheld the appeal and quashed the original decision.

What does this mean for employers?

The JFM appeal decision has provided further clarity on when an employer can make an application to reduce redundancy pay.

The FWC has confirmed that its powers under section 120 of the FW Act to reduce a redundancy entitlement are limited to employees whose redundancy entitlements arise under section 119 of the FW Act. Many awards simply provide that the redundancy provisions in the award reflect those in the National Employment Standards (i.e. the provisions in s119 to s123 of the FW Act) and in those cases given the entitlement to redundancy pay comes from the FW Act, an application under section 120 to reduce a redundancy payment would still be valid.

Whilst industry specific redundancy schemes in awards are relatively uncommon, given the number of redundancies that are occurring in the current environment and the difficulties some employers may have in being able to fund redundancy payments, it is important  before making a role redundant, that employers check whether the employee is covered by an award or enterprise agreement and, if so, whether that award or agreement contains an industry-specific redundancy scheme. If they do, employers will not be able to apply to the FWC to reduce a redundancy payment in these situations.

If you have any questions regarding your obligations to your employees in the wake of COVID-19, including any advice on redundancies, please get in touch with McCabe Curwood's Employment group.


1 JFM Civil Contracting Pty Ltd v Mr Cameron Fraser [2020] FWC 2546.
2 Cameron Fraser; Construction, Forestry, Maritime, Mining and Energy Union v JFM Civil Contracting Pty Ltd [2020] FWCFB 4866.

Contributors

Liliana Freeman Lawyer
Lachlan Hallab Law Graduate